Acquiring a power plant or existing licence? Snippets of what you should know

PROEM

The Nigerian Electricity Regulatory Commission (NERC) issued several power generation licences between 2005 and 2012. Worried that many of the licensees had not done enough to justify their licensing, NERC suspended the issuance of further licenses from October 2014. NERC, however, made some exemptions for prospective licensees with ‘good cause’, such that their applications for generation licences would be given due consideration.

NERC had, in fact, listed the ‘good cause’ conditions upon which licences would be issued to cover renewable energy power projects utilizing renewable sources of fuel. Such projects include solar, wind, biomass or small hydro which require no fossils fuel supply agreement and in respect of which feed-in-tariffs have been approved.

Other projects for which licences may be obtained include those where guaranteed fuel sources for the generation of power may be a solution to waste disposal challenges, those with the potential to contribute to the stability of Nigeria’s grid system and captive generation plants with excess generation capacity to the national grid. Further, generation projects with readily available fuel sources would also be regarded as falling within the purview of projects with ‘good cause’.

As a result of this suspension and the sheer number of already licensed power generation companies which are idle, a surge in the number of transactions in the electric power sector involving the transfer of licences, power company undertakings or change in shareholding, should not come as a surprise.

In view of the foregoing, and to provide some basic guidance, we look very concisely at, and in no particular order, key matters noteworthy when negotiating the acquisition of an already existing licence or power undertaking.

KEY MATTERS

Due Diligence

Leading energy lawyer and Partner in the Energy Practice Group of Banwo & Ighodalo, Kehinde Ojuawo, would typically tell his due diligence team, that a due diligence report should not simply be a litany of problems or a mere catalogue of facts, but should comprise creative solutions (such as alternative structures) to problems and challenges found whilst conducting a due diligence exercise. The writer shares the same view and believes that apart from signing a non-disclosure and non-circumvention agreement (depending on the circumstances), the next important thing to do, is to conduct a technical, legal and financial due diligence on the relevant asset and or holder prior to making a final investment decision. Typically, experienced solicitors in that area of practice should be engaged to do that. The result of a painstakingly conducted due diligence exercise can save the client hundreds of millions of dollars; if not billions of dollars in the power industry.

Due diligence is important because the buying party is able to determine whether or not it is dealing with the true owners of the assets, what existing liabilities or obligations exist and whether there are serious issues which make a seemingly good deal in reality, an utterly bad deal which should be avoided. In the writer’s experience, there have also been situations where the result of a due diligence exercise has been used to negotiate reasonable rebates on the purchase considerations.

Due diligence is generally fact finding, but much more, like had been alluded to above. It also helps the buyer, in particular, know what specific representations, warranties and indemnities it (the buyer) should be asking for whilst negotiating the sale and purchase agreement. In fact, it is the writer’s view, that a final version of a Sale and Purchase Agreement must never be agreed prior to completing due diligence.

Regulatory Consent

Similar to the oil and gas sector; particularly since the 2012 decision in the Moni Pulo case, anyone who desires to acquire 5% or more of the shares of a power generating company requires the prior approval of NERC to close that transaction. Further, anyone who desires to acquire the whole or part of the undertaking of a licensed power company is obliged to obtain the prior consent of NERC.

Prior to giving its consent, however, NERC would typically engage the services of external solicitors to carry out legal due diligence on the assignee/transferee. It is important to factor the time this would take (typically not more than 90 days) into the transaction timetable. Further, same should be made a condition precedent to Closing the transaction and the presentation of the requisite approval of NERC should be one of the businesses to be conducted on the completion date.  Your solicitor, if experienced, should provide you with guidance through this process as same can be more intricate than specified herein.

Beyond the consent of NERC, depending on whether the deal is structured as a share transaction or an asset-type transaction, and whether there are pipelines and other appurtenances, the consent of the Department of Petroleum resources (the “DPR”)/ the Minister of Petroleum Resources and even that of the governor of the relevant state may be required if it is an asset sale-type transaction. It is pertinent to note that the foregoing may only be relevant where pipelines and other infrastructure under the regulation of another ministry, department or agency of government are concerned.   

Outstanding Regulatory Obligations

It is important to note that NERC would not grant its consent where an assignor remains in breach of its obligations under any of its Orders, Rules, Regulations or the EPSRA. In particular (and similar to oil and gas divestments) where financial obligations such as the payment of the annual operating fees or such similar fees remain outstanding, NERC would not grant its consent to the transfer. Specifically, NERC has stated that it shall not grant its consent where any annual operational levies, fees, fines or penalties remain outstanding. Hence, the assignee and assignor should work together to ensure that all such fees etc. are paid.

Environmental Issues

Although, generally, these issues may be subsumed under due diligence related matters, but the importance of same makes it necessary to highlight same. It goes to the root of many issues including financing and huge liability, where care is not taken; particularly because some environmental matters may be latent and end up only being noticeable years after the transaction may have Closed so it is important to have warranties and indemnities in the relevant Sale and Purchase Agreement, specifically speaking to environmental matters and ensuring that as much as possible, the limitation period is several years from Closing.

Tax Liability

Tax liability issues are particularly knotty especially considering the fact that the Federal Inland Revenue Service may seek to unravel same several years after same took place. This could be particularly problematic where it is a share deal such that it won’t matter that the ownership of the company has changed because it is the company, as opposed to its shareholder that would be said to owe tax obligations. This is because a company is generally separate from its shareholders. For more information on the electric power sector, read the text: The Nigerian Electric Power Sector by Ayodele Oni.

CONCLUSION

The foregoing is by no means an exhaustive list of matters worthy of note when negotiating the sale and/or purchase of a power plant, the undertaking of a power generation company or indeed its licence. The paper only seeks to highlight some of the issues the writer has come across whilst negotiating/ advising on such transactions.

Ayodele Oni  HYPERLINK “mailto:{ayodeleoni@outlook.com}” {ayodeleoni@outlook.com}, a solicitor, specializes in international energy (oil, gas and electricity) investment law and policy. He holds an LL.M in energy law and a mini-MBA in power & electricity. Follow me @ayodelegoni.

Ayodele Oni